Dear Carrie: We're doing a major home renovation and are weighing the best way to pay for it. What's better, taking a 401(k) loan or borrowing from a home equity line of credit? Another option is to sell some stocks. What do you think? — A Reader

Dear Reader: First of all, you're lucky you have options. And there's some merit to each of the three possibilities you mention. One may be better for you than another, depending on your personal financial situation, but you should definitely look closely at the pros and cons of all three. I'm going to start with what I think is the least appealing.

WHY A 401(K) LOAN SHOULD BE LAST ON YOUR LIST

A lot of people think of a 401(k) loan first because, on the surface, it seems to make sense. It's your money, interest rates are usually fairly low, and you pay the interest back to yourself. Sounds great. But here's the catch: When you borrow from a 401(k), you're immediately depleting your retirement savings — and, to me, retirement always has to come first.

So let's say you borrow $50,000. First, you no longer have that $50,000 working for you tax-deferred. Second, you're borrowing money you put in pretax but, although you're paying it back with interest to yourself, your payments are made with after-tax dollars. Then when you finally make withdrawals from your 401(k) at retirement time, you'll pay income taxes again on that $50,000. So, in effect, you're paying taxes twice.

Finally, although a 401(k) loan generally has a five-year repayment schedule, should you change jobs or lose your job, you usually have to repay the 401(k) loan within 90 days or it will be treated like a distribution, subject to income taxes and a 10 percent withdrawal penalty if you're under 59 1/2. So once you dig a little deeper, a 401(k) loan may not be so appealing.

THE PLUSES OF A HOME EQUITY LINE OF CREDIT

A home equity line of credit has fewer risks attached, assuming you have sufficient equity in your home and you're not overextended debt-wise. And there are a couple of significant benefits.

While interest rates vary and may be slightly higher than interest on a 401(k) loan, you can deduct the interest expense on up to $100,000 ($50,000 for married people filing separately) of home equity debt secured by your home, whether in the form of a regular loan or a revolving line of credit.

So when comparing interest rates, you have to factor in the tax deductibility. For instance, if you're in the 25 percent tax bracket with a fully tax-deductible HELOC at 5 percent interest, you're really only paying about 3.75 percent.

Plus, a HELOC is usually taken out for a longer period of time, so you can adjust the payment schedule to your current and future needs.

HOW SELLING SOME STOCK COULD FIT YOUR OVERALL FINANCIAL SITUATION

Selling assets to pay for a home renovation isn't necessarily a bad idea, as long as you choose the assets to sell in the context of your overall portfolio. Deciding when and what to sell is a complex subject, worthy of a separate column, but in a nutshell, you need to look at three things: the quality of the investment, how it fits in with your asset allocation, and how a sale might impact your taxes.

In terms of quality, quite simply, if you wouldn't buy the investment today, it's a good sell candidate. In terms of your asset allocation, if the rise in the market has increased the stock portion of your portfolio beyond your comfort level, you could sell stocks to bring your stock allocation back into line with your goals. Also look at your diversification within each asset class. Overflowing with high-tech? Consider paring back.

Finally, it's a good idea to consider your annual tax bill before you sell, balancing capital gains with capital losses. And remember that a gain on an investment you've owned for less than a year will be taxed at your ordinary income tax rate, not the lower capital gains rate.

TAKING A DIVERSIFIED APPROACH

There's nothing that says you have to exclusively take one approach or the other. A combination might be the best way to balance risk and debt and protect your retirement.

Take a step back and look at your overall debt. Ideally, no more than 28 percent of your pretax income should go toward home debt; no more than 36 percent should go toward all debt (home, car, credit cards, etc.). Consider how much you could borrow from a HELOC and still stay within those guidelines.

Then take a look at your portfolio. Review your asset allocation to see if selling certain stocks or bonds might actually put you in a better position to achieve your goals.

If you can come up with the cash to pay for your renovation from those two sources, that would be my recommendation. If you absolutely have to consider a 401(k) loan to make the numbers work, borrow as little as possible and do your best to pay it off as quickly as you can.

Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER(tm), is president of Charles Schwab Foundation and author of the forthcoming book, "The Charles Schwab Guide to Finances After Fifty," available in bookstores in April 2014. Read more at http://schwab.com/book.You can e-mail Carrie at [email protected]. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.